Walter Hutchens’ Blog

Just finished a one-month course (a course within a course, actually) on the global financial crisis and its aftermath. This was a reprise of my Jan. Term class.

I taught it as part of “Core 350,” an applied ethics and public policy course required of all undergraduates at Whitworth, the college where I teach. The course is composed of three segments. For both the first and last segments, the students meet in a large auditorium in plenary sessions (about 160 students). But for the middle segment of the course, the students meet three times per week with just their discussion group (d-group) of only 20 students to explore a single public policy topic or theme in depth. As the topic for our d-group’s intensive study I chose the current global economic turmoil, or “the financial crisis and its aftermath.”

It was good to explore with another group of students all the intricacies of what caused the near global “meltdown” in September 2008 and what’s been done to fix things (and what’s been proposed on the “never again” front). We all learned a lot, including me.

To begin the course I again used scenes from the classic movie It’s a Wonderful Life. Clips of the movie allow me to depict the concept of a bank run or liquidity crisis, some basics of mortgage lending (George Bailey was in the business of helping people get houses, including people who would not have been regarded as ideal credit risks at that time, long before the current sub-prime era—though nothing in the movie suggests that he was involved in securitization or using 30:1 leverage for proprietary trading of “naked” credit default swaps or other derivatives!)

This time, on the first day, I added an exercise where I asked the students to sketch (literally) their dream houses, then write a paragraph or two to describe in prose the kind of place where they’d one day like to live. That was an effective ice-breaker and entry point into the material. Soon enough, we were discussing mark to market accounting, credit default swaps, collateralized debt obligations and the repeal of the Glass-Stegall Act. Better to start by drawing pictures of houses, like in grade school, to ease into it.

I assigned the books Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked and Government Bailouts will Make Things Worse by libertarian Thomas E. Woods and Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly. In the spring when I re-teach the unit, I am thinking of adding It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street by Nomi Prins, and I may replace Kelly’s engaging book (which worked well) with House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William Cohan. I enjoyed Kelly’s book (and admire her reporting for the Wall Street Journal), but the Cohan treatment seems better in terms of explaining, for non-initiates, the financial background, not just telling the gripping story of Bear Stearns’ ultimate collapse (with background on the colorful characters). I think the Prins book (which is both well researched and forcefully argued) would pair nicely with the Woods book—she mainly blames Wall Street banks (and government de-regulation of banks); Woods blames government interference. That sets up a nice argument, and each book is well written (though when Woods tries to implicate the Community Reinvestment Act as a significant factor in this debacle his stock dropped in my eyes). I also want to assign Daniel McGinn’s House Lust: America’s Obsession With Our Homes, but the campus bookstore, which routinely performs miracles, couldn’t get their hands on enough copies in time . . . perhaps they can do that for the spring. Also, I have a stack of yet-to-be-read books on the still-unfolding debacle on my nightstand; that stack probably includes some other great choices, so I won’t decide just jet.

For the final exam for this unit on the current economic turmoil, for one question I asked the students to give an example of how (or at least how others have argued) 1) wretched excess, greed and recklessness on Wall Street, 2) government actions, 3) government inaction (or de-regulation) and 4) consumer misbehavior contributed to the current turmoil. They had plenty to write.

Sadly, I had three very fine accounting students in the group who got disappointing news about their job searches during our “course within a course.” These are good, likable students—students who majored in accounting for goodness sake!—and they were being told, “in a normal year, we’d hire 10 and you’d be in that group, but this year because of the economic slowdown we are only hiring three new grads and you’re ranked fifth” or something along those lines. Harsh.

It was a painful reminder that the subject we were studying wasn’t purely “academic.”

My course syllabus is here.

Now that I’ve “piloted” this course in Jan term and as part of the Core 350 program I think I’ll explore offering it through our continuing studies division. It would be interesting to examine this material with older adult (or “non traditional”) students. Most people are understandably unfamiliar with the secondary markets for mortgages and products derived from them, but undergraduates have usually never even bought a house, so even the primary transaction is unfamiliar to them. Older students would likely have had experience buying or selling real estate, or might own properties whose equity they are concerned about. That could intensify things. And their work experiences would likely enrich the class (they might themselves have been mortgage brokers or realtors, before this debacle).

This week my class on the global financial crisis ended. I was fortunate to have worked with a great group of students. We were, obviously, dealing with an important, complex topic with extraordinary relevance. It was, I think, a great class.

Some of the students from class on the global financial crisis.

That sounds immodest, but the class was great for many reasons that were wholly unrelated (or only coincidentally related) to anything I did. I’ll list several of those factors below, but first let me brag a bit about the class and these students.

I am tremendously proud of everything the students learned. I believe any one of them could now give a coherent account of what’s gone awry in the economy, connecting the dots between decades of low interest rates and global development (creating pools of hungry capital), the resulting expansion of subprime lending (and race to the bottom in underwriting standards), mortgaged back securities and derivatives traded in the secondary markets, high leverage, and the resulting liquidity crises that sprang up once housing prices stalled and defaults increased, and the resulting global economic slowdown and negative feedback loops in which we now find ourselves. We had good discussions about whom to blame for what’s happened and also had good debates about what ought to be done now (and the appropriateness of what has been done) to thwart further catastrophe.

They learned a lot of relevant technical terms and concepts, too. They can all I believe explain what an investment bank does and what a hedge fund is, know the difference between a credit default swap and a collateralized debt obligation and can explain the relevance of the TED Spread. They know who Neel Kashkari and other key players are, and they know how the use of TARP funds changed over time. They can tie debates over the stimulus package into long-standing debates between Keynesians and Chicago/Austrian School economists. Whatever their political views (and we had a predictable range), they are informed, not mere bumper sticker platitudes.

Beyond learning a lot of important technical information and putting together a coherent big picture narrative, the students now also know something about the local impact of the current economic turmoil. We heard presentations from the owner of one of the leading local real estate firms. He told us how “months of available inventory” have spiked locally. He also explained how the sluggishness of some local banks in handling pre-foreclosure “short sales” have gummed up the non-foreclosure market, even though housing depreciation in Spokane hasn’t been nearly as severe (and the increase in foreclosures hasn’t been nearly as pronounced) as in some other markets. Our university’s vice president of finance and operations also gave us a very informative, candid talk. He explained how the shirking endowment, problems at the Common Fund (which used Wachovia as its custodian bank), and general economic uncertainty are affecting our own institution’s plans to build a new science building and budget for next year. In the first week of the course the students interviewed their own parents, asking about percentage declines in 401ks, the number of houses for sale on their block and whether layoffs or other retrenchment had affected their parents’ companies yet. All of this made the subject more immediate, not just “out there” abstractions.

Now, what made this class work so well?

Obviously, one key reason for the success of the class was its uncanny synchronicity with important, unfolding events. If I teach another forty years, I doubt I will ever again have an entire class so perfectly aligned with events dominating the news. Congress debated the release of the second half of TARP funds, confirmation of the new treasury secretary and how to structure the nearly trillion dollar stimulus package as we studied these issues. The students were reading the official summary of the stimulus bill the same week as the representatives who needed to vote on it. One day a student gave a presentation on “Who is Ben Bernanke?” The next day, we watched clips from a speech he had just given at the London School of Economics on the Fed’s efforts to respond to the crisis. We just couldn’t have dealt anything more topical or been closer to “real time.”

Most importantly, the students who took the class were an unusually bright and motivated group, and they participated actively. I told them we would have a seminar, not a lecture course, and that I expected them to do more talking than me. It worked out that way. The students’ lively engagement made the class a delight. It helped all of us, including me, learn a lot.

Also, we had a great mix of participants in terms of majors and class seniority. We had economics majors taking literally their last undergraduate class, accounting majors, physics majors, sociology majors and even a few first-year students. This mix was helpful in a number of ways.

Our first-year, non-business school students asked great, fundamental questions like “what is an option?” That helped all of us ground the discussion and build our understanding brick by brick.

Our more senior, specialized students were able to take the lead on topics not as accessible to beginners. Our economics students, for example, helped everyone understand what the Fed is and what it actually means when they “cut” interest rates to nearly zero. An accounting major gave an excellent presentation on mark to market accounting, explaining how that FASB rule seems to have accelerated the crisis when markets for certain derivatives became illiquid. We had a student from the PRC talk about the impact of the crisis on China, and a student from Europe talked about the impact and response there. The class was an almost ideal blend of students (we had no one from Iceland, alas, but did have a good presentation on the impact of the crisis there, too).

Another reason the class worked so well, frankly, is that I got out of the way. I had to, given that before the class I wasn’t myself sure what the TED Spread was and couldn’t have easily explained the difference between an MBS, CDO or CDS. My main role was simply to propose the class (as department chair, I felt it would be gross negligence for our business school not to offer a class on the most important business story in a long, long time), offer some framework questions and then come up with a list of specific subjects that I knew we would need to know more about. I assigned those topics to the students, and they then did research, assigned selected readings to the other students and made presentations on their respective topics. I simply sat in the room as another participant, chiming in from time to time. It is humbling and useful to realize that my greatest pedagogical effectiveness often occurs when I talk the least.

Technology helped, too. For a current-events driven class, it was invaluable to be able to replay clips from C-SPAN, two great episodes of This American Life about the crisis (1, 2), NPR news stories (and content from the fabulous NPR Planet Money Blog). Broadcast content used to be ephemeral (or at least inconvenient to recover); now vast amounts of it are available on demand. This is a powerful shift for educators. We watched Representative Waxman interrogate Alan Greenspan, getting him to admit he had been wrong in thinking that financial institutions would act in their own rational self interest, making it unnecessary to regulate derivatives. After presentations about Henry Paulson and Kashkari, we watched them testify before congressional committees. The students also collaborated in Google Docs, which not all of them had used before (early in the term we spent a few minutes on the very practical 21st century skill of “how to hyperlink.”)

Of course, my ebullience over all the students learned, the success of the class and how fascinating the crisis is as an intellectual matter is overshadowed by grim economic realities. Unemployment grew substantially even during the three weeks the class met (it was a special January term class that met every day for three hours). Poignantly, a student who took this class as his last-ever undergraduate class is among the finest seniors on campus; he has a nearly perfect GPA and is an outstanding, winsome young man . . . and so far he can’t find a job.

So, what’s ahead? The current shrinkage of aggregate global demand may be sufficiently mitigated by current monetary policy and stimulus plans. This whole, painful ordeal may lead to better financial sector regulation. This downturn may prompt households, corporations and ultimately governments (especially in the debt-addicted US) to de-leverage in a healthy way. Or it may be time for all of us to re-learn how to farm. All that is unclear to me. But I am pretty sure that the small group of students that participated in my class understand the causes, consequences and government responses to the ongoing economic turmoil as well as any undergraduates in America, if not the world, and I am extremely, and I hope justifiably, proud of that.

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Besides the course syllabus, this link also lists the readings and some of the multimedia selections the students assigned each other. Many of these choices could be supplemented and upgraded, no doubt, but some of them are spot-on, and the overall course template (the framework questions, list of topics covered, format of having students make presentations/lead discussion on the specific topics) worked very well. This is what I would build from were I to teach the course again.

Oh, and here’s the final exam. It was only 10% of the grade; the two presentations each student gave and participation in daily discussions constituted the bulk of what they were assessed on, and as in many good classes grading and the exam became a sideshow rather than the main event.

Comments welcome.

Today in my international business class I played an excerpt from the Yum Brands (YUM) conference call for the third quarter, held just last week. (Yum’s corporate website; Google Finance info; Yahoo Finance info).

The first part of the call is dominated by discussion of China, the brightest spot in Yum’s operations. Yum’s CEO said he imagines having 20,000 restaurants in China one day, which he asserted seems entirely reasonable given that McDonald’s Corp. has 14,000 outlets serving a US population of only 300 million (compared with China’s 1.3 billion).

Yum grew by more than 20% in China for the quarter, compared to essentially flat growth in the U.S.

After listening to this CEO in Louisville, Kentucky brag about how his company was buoyed by its China results, the class compared the US and Chinese websites for KFC. We noted how the Chinese website has a much more youthful and sports-focused theme.

The class didn’t have any students who read Chinese, so I gave them a little guided tour of the website, pointing out how the name of the featured 3-on-3 basketball tournament creates a nice English-Chinese rhyme (between 3-on-3 and Ken-de-ji or Kentucky in Mandarin). I also pointed out how the website featured a booklet celebrating KFC’s 20 years in China.

The US website, though carrying a nice banner about a corporate effort to fight global hunger, looked much flatter than the Chinese site and emphasized, if anything, cheap prices more than youthful vigor.

On the call the CEO noted that besides KFC and Pizza Hut, Yum is developing some chains in China that don’t yet exist in the US, including a sit-down restaurant called Tea Time which they say might be able to challenge Starbucks in China. They are also testing a different quick-service chain in Shanghai now.

I think hearing about how Yum’s China operations are the company’s best current and future growth story and noting some contrasts in the marketing messages between the two websites helped drive home some lessons about the challenges (and opportunities!) of striking the right balance between global standardization and localization. The website contrasts also helped underscore the difference between corporate strategies of competing on price vs. other kinds of distinctiveness.

Bloomberg’s coverage of Yum’s earnings report is available here.

It’s always bothered me that I spent three years and more than $100,000 on a legal education (which included a required full academic year of studying contracts) yet saw my first contract only after I graduated, passed the bar and was sent to a room filled with boxes of contracts and told to “look for anything unusual.”

Reeling from that experience, I’ve always made an effort to distribute at least one sample contract to my business law students and teach them some basic things about typical contract structure.

Of course I don’t need to prepare my students—mostly undergraduate business majors—to do legal due diligence, but I think showing them at least a few sections of a sample contract accomplishes several useful things. It’s extremely helpful for them to learn how lawyers can add value to corporate transactions by providing terms that help assure risks are thoughtfully allocated and information asymmetries between buyers and sellers are reduced. It’s also good for them to understand how reps. and warranties, covenants and indemnification provisions function in a typical M&A deal. At the very least, I want them to know what is meant by “due diligence.”

In previous years I’ve used the table of contents and a sample provision or two from the ABA’s Model Stock Purchase Agreement, but today I tried something different.

Earlier this semester I had talked with the students about the Viacom v. YouTube/Google litigation, using this current (and thus far unresolved) case as a way to illustrate some basic principles of court procedures (in particular, the necessity of a court having both personal and subject matter jurisdiction and how a complaint plus the defendant’s answer constitute the pleadings that kick off litigation). More recently the case helped me underscore the significance of some IP rules.

Because virtually all the students use Google every day and most of them have watched YouTube videos on occasion, I think it’s been a vivid series of examples. Today I used another Google example to begin our discussion of contract law.

I gave each student a copy of the contract for Google’s acquisition of YouTube.

I showed them how I found it through the SEC’s EDGAR service

To set the stage, I explained what an information asymmetry is (for example, I know what’s on the test but they don’t). I explained how problems of information asymmetry are inherent in many types of business transactions including M&A deals and the public trading of securities (because insiders know more about a company than outsiders and that information is important for valuation).

I then talked about how (1) mandatory disclosure for public companies, (2) due diligence investigations by business people (and their accountants and lawyers) and (3) the terms of a stock purchase agreement are all ways to overcome these information asymmetries.

I then began to walk them through the Google-YouTube contract, explaining how the reps. and warranties section creates disclosure duties (“we’ve paid all our taxes and have no litigation except as disclosed on the attached schedule”).

Next time we’ll look at the indemnification provisions that add force to the reps. and warranties.

This summer I helped orchestrate a five-week summer program in China for US law students. The program was organized by the law school of the University of Minnesota.

It was a lot of fun helping 34 law students, three US law professors, two Chinese language instructors and an assortment of other guests experience China, many for the first time. They learned a lot and I think had a great overall experience.

The group took classes four days a week. On Thursdays and on some weekends we organized field trips. These excursions afforded the participants some outstanding experiences.

We visited the Great Hall of the People where they heard from senior staff members of the National People’s Congress Standing Committee.

We went to the Supreme People’s Court and met with four sitting judges.

By happenstance, retired U.S. Supreme Court Justice Sandra Day O’Connor was in Beijing this summer, and participants in the summer program had front-row seats to hear her speak. Dean Stephen Hsu of the School of American and Comparative Law at the China University of Political Science and Law made that possible. CUPL partners with the University of Minnesota Law School for programs in China. Coincidentally, Dean Hsu and I worked together at the same law firm earlier in our careers, and it was nice to interact with him again.

The students also got to hear from leading local and expatriate lawyers. A panel of distinguished Minnesota alumni spoke to them the first week, and the last week they heard from an expert panel on Chinese legal reforms.

In addition to their formal classes and law-related field trps, we organized a number of cultural excursions. The group hiked the Great Wall and watched an acrobatics show. Most of them also participated in an optional field trip to Shanghai. They also got to visit the offices of the Beijing city planning bureau where they heard about the venues under construction for next summer’s Olympics.

There are a number of other China-based summer program for US law students, but surely Minnesota’s is one of the best. I was delighted to be involved in it and value the many new friends I made.

This academic year I am living in China conducting research and assisting with the China-based programs of my employer, the University of Maryland’s Robert H. Smith School of Business. Last weekend, just before the Chinese New Year, we held commencement exercises for our second Beijing-based class of executive MBA students. A story about the graduation exercises is here and a few photos are here.